How One Stock Changes Everything

Where were you in August 1994, and what were you doing? When I tell you where I was -- and what I was doing -- you won't believe it. (Of course, you'll have to read to the bottom to find out.)

I hope you were buying stocksBecause I wasn't. I sure wasn't betting $1,800 on a company most people had never heard of. But I know somebody who was, and he was about to make a lot of money. I know this for two reasons.

First, that one trade made this guy a legend around here. Second, he told us exactly what he was going to do before he did it. Then, in a move that was revolutionary at the time, he tracked his returns, in pretty much real time, online for the world to see.

Five years later, his split-adjusted $0.46 shares hit $50. Before you could say "mad money," Money.com dubbed him "among the most widely followed stock market advisors in the world," and his $1,800 stake was worth $190,000.

Yes, you read that rightThat stock was America Online -- and the investor was David Gardner, co-founder of The Motley Fool. True, we were in a bull market -- true, this was before Steve Case stuck it to Time Warner (NYSE: TWX) -- but there may have been more at work than that.

In August 1994, AOL satisfied David's No. 1 criteria. The company was what he called a "first mover" in an important, emerging industry. And this may surprise you -- it sure surprised me: David still owns AOL, and he's still up.

If you'd bought AOL with him, you'd still be up some 1,600%. If, like my college roommate, you saw the PC revolution coming and bought Intel (Nasdaq: INTC) or Oracle (Nasdaq: ORCL) instead, you'd be up 400% or 1,400%, respectively. And that's after two of the greatest bear markets in history.

If you rolled the dice on Applied Materials (Nasdaq: AMAT) , you'd still be sitting on big gains. Even Corning (NYSE: GLW) , a glass company since held up as the poster child for the tech-stock bubble, is up over that time period.

I'm shocked, shocked to hear ...Maybe none of that surprises you, but it did me. In fact, it got me rethinking two long-held beliefs -- one of which led to something of an epiphany.

The other was more of an affirmation: If you're trying to build wealth, it pays to keep investing. For me, that means buying good companies, whether the market looks overvalued, cheap, or downright scary. Especially if you're fortunate enough to to catch lightning in a bottle.

After all, while it's true that AOL wasn't the only great call in David Gardner's original Rule Breaker portfolio -- he also recommended Amgen (Nasdaq: AMGN) and eBay (Nasdaq: EBAY) in 1998 and 1999, respectively -- if you take away that one 1,600% winner, David looks human. More on that just ahead.

But first, the epiphanySlow and steady may not win the race. Like most Fools, I've been schooled in Warren Buffett's rules of investing. You know, "Rule One: Never lose money. Rule Two: Never forget Rule One."

But what if David Gardner's right, too? What if, most nights, you can get by with just a few big swings? What if it's true that nine out of every 10 stocks you buy can go to zero and you'll still break even -- if you find just one 10-bagger?

Of course, it is true. It's a mathematical certainty. And that, my friend, is how one stock changes everything.

Because, brace yourself ..."The Tortoise and the Hare" isn't a true story. It's not even based on one. Take away AOL, Amgen, and eBay ... and David's pretty average, right? But that's crazy talk. You don't compare the batting average of a singles hitter with a slugger.

The fact is, David's kamikaze style works for him over the long run. I've seen it with my own eyes. And not just in the go-go '90s. In 2004, David launched a new Rule Breakers newsletter to prove he could find this decade's great growth stories.

How does he plan on pulling it off? For starters, he runs every company through a six-point checklist:

Is it the top dog and first mover in an important, emerging industry?

Does it have a sustainable advantage?

Does it have strong past price appreciation?

Is good management in place with smart backing?

Does it have strong consumer appeal?

Has it been called overvalued by the media?

Looking to hit one out of the park?If you can find a stock with all six traits, you may well have a Rule Breaker in the making. And contrary to the hysterics in the media pronouncing the death of buy-and-hold investing, I'd argue this is the time to buy stocks for the long run.

So, by all means, steal David's six-point checklist to get moving. But if you want a shortcut (seriously, who doesn't?), here's an easier idea to consider: Take David Gardner up on a special offer to try Motley Fool Rule Breakers for 30 days free.

You can use the complete service for a whole month, see every single past pick, and read every back issue. You'll also discover what David Gardner calls "the two words Bill Gates doesn't want you to hear," and the three companies that will power the next PC revolution. Of course, there's no obligation to subscribe. To have a look, click here.

This article was first published May 31, 2007. It has been updated.

In 1994,Paul Elliottwas writing strange poems and banging around the Midwest in a Ford Econoline. He doesn't own any of the stocks mentioned. Intel is a Motley Fool Inside Value recommendation. eBay is a Stock Advisor recommendation. The Fool owns shares of Oracle. You can view the entire Rule Breakers scorecard with yourfree trial. The Motley Fool has adisclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.